Daily Market Commentary

€
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3735 level and was capped around the $1.3825 level. The common currency reached its lowest level since 27 October as a renewal of eurozone sovereign credit jitters continued to pressure European assets. Yields on Irish 10-year debt reached their highest level since the Irish financial crisis began. Poor cash trading in Irish assets led to higher yields in credit default swaps, rendering it more costly for investors to protect themselves against an Irish credit default. Irish Prime Minister Cowen is indicating the country has enough capital to get through June 2011 but that is partially predicated on the country’s ability to issue new debt at rates below the market’s current levels. Many dealers expect Ireland will be forced to tap the emergency eurozone fund established earlier this year to prevent sovereign bankruptcies. The European Union extended Ireland’s bank guarantee until 30 June 2011 today. Greek finance minister Papaconstantinou yesterday reported Greece “is not Ireland” and noted the Greek banking system “did not get ahead of itself.” He also suggested Greece will close 2010 having reduced its budget deficit around 5.5%. Data released in Germany today saw the October wholesale price index off 0.3% m/m and up 7.7% y/y. French data saw the October headline consumer price index up 0.1% m/m and 1.6% y/y while the harmonized component was up 0.1% m/m and 1.8% y/y. Additionally, September industrial production was up 0.1% m/m and 5.1% y/y while September manufacturing production was off 0.1% m/m and up 4.9% y/y. In U.S. news, data released today saw the September trade balance come in a little better-than-expected at –US$ 44.0 billion, down from the revised August print of –US$ 46.5 billion. The October import price index was up 0.9% m/m and 3.6% y/y and MBA mortgage applications were up 5.8%. Additionally, weekly initial jobless claims were released early and fell to 435,000 from the revised prior reading of 459,000 with continuing jobless claims falling to 4.301 million. Dallas Fed President Fisher shook the markets this week when he reported the Federal Reserve is not seeking to create inflation as it injects liquidity into the financial system. St. Louis Fed President Bullard reported the benefits of quantitative easing outweight the risks while Fed Governor Warsh warned the Fed’s purchase of US$ 600 billion in additional Treasuries may fail to benefit the economy. Fisher also said the Fed’s latest quantitative easing policy may be the “wrong medicine” for healing the economy. Exchange rate misalignments will be discussed at the G20 meeting in South Korea later this week amid criticism the U.S. is no longer pursuing a strong U.S. dollar policy. Officials will likely avoid setting specific targets for current account surplues and deficits. Euro bids are cited around the US$ 1.3650 level.
¥/ CNY
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥82.30 level and was supported around the ¥81.55 level. Technically, today’s intraday low was right around the 23.6% retracement of the ¥85.95 - ¥80.25 range. Bank of Japan Governor and Prime Minister Kan discussed the economy today. There is speculation that global opposition and criticism of the Fed’s latest quantitative easing program may render Bank of Japan less likely to adopt further aggressive monetary easing steps. BoJ Governor Shirakawa last week said the central bank would, if needed, expand an existing ¥5 trillion asset purchase fund. Deflation remains rampant in Japan and the central bank may decide to only expand policy further if the yen strengthens sharply from current levels. Shirakawa also noted he wants to avoid the negative effects from liquidity bubbles, thus additional BoJ easing cannot be viewed as a foregone conclusion. Finance minister Noda said the government may “soon” allow the Bank of Japan to reduce its contributions to the national treasury if it incurs losses in its ¥5 trillion asset purchase program, an admission of how dangerous it can be for the central bank to expand its balance sheet. BoJ this week reduced its monthly economic assessment, noting the economic recovery is “pausing” on account of “flat” export and production activity. Data released in Japan overnight saw October consumer confidence decline to 41.1 from the prior reading of 41.4. Data to be released tonight include September machine orders and the October corporate goods price index. The Nikkei 225 stock index climbed 1.40% to close at ¥9,830.52. U.S. dollar offers are cited around the ¥83.10 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥113.35 level and was supported around the ¥112.20 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥132.80 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥84.60 level. In Chinese news, the U.S. dollar depreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.6341 in the over-the-counter market, down from CNY 6.6434. The yuan is now at its strongest level since 1993. People’s Bank of China adviser Xia Bin called for a “gradual” reform of the global currency system. PBoC is said to have ordered some Chinese banks to increase their reserve ratios overnight by 0.50%, effective 16 November, in a further effort to cool the lending market. Data released in China saw the October trade surplus print at a larger-than-expected US$ 27.1 billion as exports were up 22.9% y/y, far above September’s tally of US$ 16.9 billion. These data will lead to additional pressure on China at this weekend’s Group of Twenty meeting. The government’s inflation report tomorrow could show inflation accelerated to 4% last month from September’s 3.6% pace. Banking giant Standard Chartered last week predicted another increase in China’s key lending rate to 5.81% by the end of 2010. Two-year interest rate swaps are currently pricing in four rate hikes from PBoC over the next twelve months, moves that could take rates higher by 100bps to 3.50%. Data to be released in China today include October producer prices, October consumer prices, October retail sales, and October industrial production.
£
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.6100 figure and was supported around the US$ 1.5960 level. Stops were reached below the $1.6080 level, representing the 38.2% retracement of the $1.6298 – 1.5950 range. Bank of England released its Quarterly Inflation Report today and was more hawkish than expected, having upwardly revised its consumer price inflation forecast. BoE warned inflation may accelerate above its 2% target range and this reduced speculation the central bank may increase its £200 billion asset purchase program. The report noted Monetary Policy Committee members are having a “vigorous debate” over the risks of inflation. Prior to the release of the report, many dealers believed there was an asymmetrical bias to ease but the MPC’s admission that inflation will be above target for 2011 could mean the MPC is more symmetrically-positioned, meaning no easing or tightening bias. BoE Governor King added to this view today when he reported inflation risks are “balanced.” BoE also reported gross domestic product growth should remain “a little more likely” above the historical average. October Nationwide consumer confidence data will be released tomorrow night. Cable bids are cited around the US$ 1.5960 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8550 level and was capped around the £0.8635 level.
CHF
The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9750 level and was supported around the CHF 0.9670 level. Stops were reached above the CHF 0.9735 level, representing the 23.6% retracement of the CHF 1.0625 – 0.9460 range. Data released in Switzerland today this week the October SECO consumer confidence index fall to +7 from the prior reading of +16. Other Swiss data released this week saw the October jobless rate tick lower to 3.6% from the September level of 3.7%, the lowest level since May 2009. Notably, Swiss core inflation was negative in October for the first time in at least sixteen years. This renders it likely SNB may be forced to keep interest rates relatively low for quite some time. Swiss National Bank member Danthine last week reported “We can’t exclude that inflation could temporarily turn negative at the beginning of 2011. If the downside risks to the economy materialized and then translated into a deflation risk, the SNB would take all measures needed to ensure price stability.” Danthine also warned the Swiss economy will evidence “weaker” growth in 2011 after growing around 2.5% in 2010. In September, SNB kept its main interest rate unchanged at 0.25% and reduced its inflation projections through early 2013. U.S. dollar offers are cited around the CHF 0.9925 level. The euro appreciated vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.3425 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 1.5675 level.